Sorted: Interview

„With the right guidance, anyone can get a handle on their taxes“

Sorted is an accounting app that allows freelancers and self-employed people to take control of their taxes and reduce accounting costs. In the interview, founders Nir Shub and Tom Raz talk about self-employment as a contemporary and modern model, positive developments through the Covid-19 crisis and how Sorted wants to ease freelancers’ tax return anxiety.

Sorted supports self-employed and freelancers with their taxes. Can you describe in a bit more detail what services you offer?

Sorted is an accounting software for freelancers and self-employed persons that allows you to do tax returns in a quick and easy way. Afterwards you can submit them via the ELSTER interface, without even creating your own ELSTER account. With Sorted, you intuitively create your tax reports online and submit them directly to the tax office. The highlight: Sorted eliminates the tedious filling out of long tax office forms, as is the case with ELSTER online. Instead, all relevant information is easily recorded using simple questions and answers and made available to the system for automatic preparation of the tax returns. Especially the registration of the self-employed activity by means of the dreaded questionnaire for tax registration is done in a few minutes with Sorted. Up to a certain revenue limit, Sorted is completely cost free and thus ideal for growing. With the Basic plan, freelancers can register themselves with the tax office, record their income and expenses, and prepare and submit their surplus income statement. In addition, professional immediate help from certified tax consultants can be requested and booked on demand at any time. As soon as the business becomes larger and thus subject to VAT, you switch to Sorted Pro and the still very slim price of 20 euros per month. This plan expands the scope of features to include VAT tax returns as well as the recapitulative statement. In addition, the intuitive invoice tool is available to freelancers in every version. With brief and informative guides to the respective steps, which you click directly in the app, we want to give freelancers the tools they need for processing quickly and to the point. If there are still uncertainties or questions about a specific tax case, our selected experts are there to help – either by mail, phone or chat. All at unique, transparent prices.

In Germany, self-employment and freelancing are often considered second-class jobs. What is your opinion on this?

It’s true, for a long time self-employed and especially solo self-employed workers had a hard time in the public perception. Although they often have to work harder and more disciplined than many permanent employees, self-employment or freelancing is considered less valuable. However, this perception is changing. We see a clear trend toward more public recognition of self-employment as a freely chosen way of life. Last year in particular saw a marked improvement. Freelancers are no longer considered as people who “didn’t make it” to a regular job. After all, permanent employment is still considered the normative way to work in Germany, I’ll say. Lockdowns are forcing even long-established analog-working companies into remote work. Thanks to this development, the image of agile, location independent work has changed. Now, freelancers are ahead of the curve in our new work reality, which in turn is becoming more like that of a permanent employee. The concept of New Work is not as new, but it puts more focus on self-employment as a contemporary, modern model. Self-employment and freelancing have always opened up thoroughly profitable advantages such as working independently of location and the possibility of setting up a small business entirely according to one’s own ideas. The option of starting out as a freelancer on the side, away from a permanent employment relationship, has always been popular, as KfW’s start-up monitors clearly show. We are definitely moving toward greater recognition of the self-employed and their way of working and living.

Keyword Corona crisis: What speaks for self-employment at this point in time?

A great deal, just as before. The notorious leap into the deep end is always associated with uncertainties, but not necessarily with more risks. At the same time, the advantages of self-employment are becoming more and more important. Home offices are being introduced or extended as default by responsible employers wherever possible. This has made it clear that working together remotely is mostly possible and often more productive than the typical 9 to 5 office setup. Also, business models that can be flexibly adapted to the current situation are now beneficial. Lockdown, short-time work or even job loss are encouraging a rethink of the working world. Those who used to work on their own projects on a part-time basis have already created a solid foothold for additional income and are less reluctant to take the step into full self-employment today. But even long-time permanent employees are using the crisis as a springboard to put their skills and creativity to profitable use. The additional income from self-employment makes it possible to stay afloat in these tough times. Interestingly, even people who were self-employed before the pandemic began are not considering a return to permanent employment. This is supported by various freelance barometers as well as the steady growth of our client base, which includes not only the many founders but also “old hands”. The vast majority of them say that they have returned to their usual business routine after a small slump in orders in the spring and no longer feel any existential fears. On the contrary: remote collaboration with customers and business partners, flexible working hours and the easier reconciliation of family and job clearly speak for self-employment – also and especially in corona times.

Do you also see positive developments triggered by the Corona crisis?

Besides the developments already mentioned, which are mainly taking place in the public perception, the influence of the Corona pandemic is clearly reflected at Sorted as well. Many founders use our platform to submit their self-employment to the tax office via the tax registration questionnaire. In the last six months, we have transmitted significantly more registrations here. For us, this is a positive sign that people are daring to do take this step more. The inhibition threshold to put worries behind them and make the dream of their own business come true is now lower, as we know from talking to customers. Most people don’t decide to start a freelance business just out of the necessity of losing their jobs and such. It’s a choice that many are simply comfortable with. And for everyone else, Sorted offers a non-bureaucratic way to test the waters of a new career.

Freelancer, self-employed, small business owner, entrepreneur – what’s the difference? Why is that important?

We initially went to market with an English-language version of our product. Our goal was and is to help freelancers from abroad through the German tax jungle. A clear delineation of terms is therefore elementary from a tax perspective, as each group is classified and treated differently by the tax office. Depending on the classification, the tax situation and ultimately the tax burden is determined. In our opinion, this is the most important, directly noticeable difference.

Entrepreneur is a title that is given to anyone who is starting a business, whether it is a company or self-employed. Those who choose the path of being the sole owner of their business are called self-employed. Compared to starting a company, registering a self-employed activity is relatively simple and involves fewer obligations to the tax office. Freelancer is a form of self-employment. This model basically includes individuals who provide pure services and do not sell physical products.

Those who are classified as Freelancer usually face less administrative red tape than tradespeople, who sell physical products and are bound by the appropriate licenses for their business. It is up to the tax office to determine whether the gainful activity falls into the category of liberal professions or whether it is not a trade after all. The question arises as to the nature of the offer. If you are engaged in a creative activity, you are most likely a Freelancer and exempt from trade tax. If you also make use of the small business regulation, you benefit from further simplifications. Small entrepreneur is thus not a separate form of business but was introduced as a special tax status to support freelancers who earn an income of less than €22,000 per year. The regulation brings relief for self-employed persons with low annual sales by removing the obligation to collect and pay VAT.

We are increasingly encountering employees who do freelance work on the side. When does a so-called “side hustle” pay off? Are we at some point threatened by American conditions in which two jobs are the rule and no longer the exception?

In fact, this type of self-employment is more widespread than one would generally like to assume. We would not recognize this as a threat, but rather as a statement of the changing understanding of work itself. The notion of the fixed employment relationship as the norm is increasingly dissolving. Many would like to realize themselves on a different level, but shy away from the responsibility of independent tax, pension and insurance obligations, as well as the associated risks of full self-employment. Part-time self-employment is a good way to find out whether you are cut out for entrepreneurship. Apart from the additional income, it is also worthwhile to examine this other way of life – because that’s what it is – for yourself without much risk. Thanks to modern software solutions, registration and tax processing are extremely simple, so that the activity can also be taken up “on a trial basis” or temporarily.

What things do freelancers/self-employed people absolutely have to pay attention to?

Freelancers have more freedom, but also more responsibility compared to permanent employees. As a freelancer, you have to pay for your own health insurance and take care of your own retirement plans. The responsibility to take care of your own taxes also needs to be considered and financially planned for. To be on the safe side, self-employed people should set aside about 30 percent of their profits for tax payments in order to be able to cushion unexpectedly high additional payments. Providers such as Sorted take away the stress and fear of these responsibilities and at the same time help to enjoy the new freedom more.

What skills do freelancers need to be successful?

The core of success in self-employment is to offer customers true expertise as well as great service. Anyone who becomes self-employed today needs to find their niche, stand out and create a strong personal brand. Personal branding is the key to success. So is keeping track of finances and key metrics, developing the business and knowing exactly how much of the profit generated to set aside for taxes. You need to make sure to earn enough from your business to maintain your current lifestyle.

How important is a good business idea? Why should you make a business plan?

To develop and grow our product, we had many conversations with freelancers who were at the very beginning of their journey. We believe to be a successful freelancer it’s most important to have a realistic assessment of the viability of their business idea and how much they need to earn to maintain their current lifestyle after all the taxes. This doesn’t always have to mean writing a 20-page business plan before putting the idea into action. For some, this may be a worthwhile starting point to define their goals and set the roadmap. However, we know many freelancers for whom self-employment more or less just “happened”, so to speak, without ever writing up a business plan. As a rule of thumb, we recommend registering freelancing as soon as there is at least one binding client interested in the service or product.

Many self-employed people have a real horror of tax returns. In your experience, what are the biggest difficulties? What tips can you give?

It has been our experience that many freelancers ultimately find their tax return easier than they thought it would be. Almost all freelancers find their situation very complex. This is due to the fact that previously the employer took care of paying the income tax. A tax return was not obligatory until now and may not have been submitted regularly as a result. Suddenly, the responsibility lies with oneself. Failure to do so can result in late filing penalties and sanctions. Many self-employed people have clients from abroad or receive a fixed salary in addition to their income from self-employment. In fact, these cases are the rule rather than the exception and do not make the tax return much more complicated. In our experience, most “horror stories” come from people who have neglected their taxes for a long time or got the wrong advice from a friend or family. As long as you follow the guidelines, filing taxes for freelancers isn’t too big a deal. Guidance is provided, for example, by ELSTER, the tax office’s online platform, software solutions such as Sorted, or a tax firm. Freelancers who have used Sorted for their tax return have been amazed to see how easy it can be to create and submit the form themselves. We believe with the right guidance, anyone can get a handle on their taxes and lose their fear of the Finanzamt.

What’s the point of getting professional help? Isn’t it enough to get a tax preparation program?

Being successful as a freelancer in today’s world requires a variety of different skills. Doing one’s accounting and taxes properly is an important aspect of being a freelancer, but it’s far from the only one. It’s just as important to create a strong personal brand, regularly invest in your continuing education, and keep improving in your profession to stand out from the crowd. Especially when it comes to marketing and branding, the help of professionals can be a gamechanger and significantly shorten the path to success. Whether a firm’s tax advisor is necessary depends on the individual’s starting point. At Sorted, we combine the ability to do one’s taxes online using simple instructions with the expertise and security of professional tax advice. A, in our opinion, timely and tailored solution for self-employed people today.

What differentiates you from similar providers such as Kontist?

We get this question quite a lot. Our approach to taxes is different from all others on the market. Most software solutions in Germany help freelancers to do their accounting, i.e. to record their income and expenses and to pay their taxes properly. The corresponding data is recorded and then sent to the tax advisor, who continues to take care of the preparation of tax returns and correspondence with the tax office.

Kontist, which recently launched its own tax service, ultimately follows the same approach. Freelancers maintain a business account that is linked to the tax advisor and takes care of clients’ taxes. Sorted is fundamentally different in this regard. We strongly believe that the most meaningful solution is to empower freelancers and small business owners to take care of their taxes on their own and feel comfortable doing so. By walking them through the process in simple terms, explaining what is relevant to them and why, we empower self-employed individuals to truly understand how the tax system works and how to prepare their taxes with confidence. This is helped by a combination of simple answering processes, compact guides and the ability to request on-demand help from certified tax advisors directly through the platform. Self-employed individuals thus gain three major benefits: Nr. 1: Our approach reduces tax preparation costs by a factor of 5-10, from approximately 2,000 euros per year to 250 euros per year. 2: Self-employed people easily gain a profound understanding of their business, their finances and how to optimize their taxes. And 3: Finally, the entire process can be handled 100% digitally from start to finish, saving a lot of valuable working time.